It may not happen tomorrow. It may not happen this year. But at some point fairly soon you will see at least one large business demise attributed to CLOs.
Over the past twenty years or so the devious minds of Wall Street have dreamed up a variety of truly exotic - and difficult to understand - financial techniques (which they call products). CLO - collateralized loan obligations - is the latest.
Basically, a CLO is a pool of bank loans bundled together by Wall Street and sold in pieces of differing degree of risk. You can buy the riskiest piece or the safest piece. One problem is that no one really knows what the true worth of a particular CLO is. Also, since the bank is going to sell the loan when the borrower walks out the door, the banker's interest in maintaining loan standards is not very great. This reminds me of the sub-prime market: make the sale and sell the risk to someone else. Another variant of the free lunch.
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